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CEO incentives for risk shifting and its effect on corporate bank loan cost

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  • Beladi, Hamid
  • Quijano, Margot

Abstract

Using a sample from 1993 to 2010 of U.S. corporate bank loans, we study the relationship between CEO incentives for risk-shifting, proxied by Vega, and the cost of corporate bank loans. Equity-based compensation can enhance risk-shifting incentives, encouraging managers to make risky choices to increase shareholder wealth at the expense of creditors. Our results indicate that firms borrow at higher rates when having CEOs with higher risk incentives. This is consistent with previous literature which state that more equity-based compensation can align CEO and shareholder objectives, but it can also increase the agency cost of debt encouraging lenders to protect themselves against risk-shifting.

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  • Beladi, Hamid & Quijano, Margot, 2013. "CEO incentives for risk shifting and its effect on corporate bank loan cost," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 182-188.
    • Handle: RePEc:eee:finana:v:30:y:2013:i:c:p:182-188
    DOI: 10.1016/j.irfa.2013.08.004
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    Cited by:

    1. Belghitar, Yacine & Clark, Ephraim, 2015. "Managerial risk incentives and investment related agency costs," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 191-197.
    2. Lu, Jin-Ray & Hwang, Chih-Chiang & Liu, Min-Luan & Lin, Chien-Yi, 2016. "An incentive problem of risk balancing in portfolio choices," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 192-200.
    3. Imes, Matthew & Anderson, Ronald, 2021. "Executive risk-taking and the agency cost of debt," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 78-94.

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    More about this item

    Keywords

    Bank loan pricing; Risk shifting; CEO incentives;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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